This Might Be The Best Explanation For The Price Mania Around Bitcoin, Cryptocurrencies And ICOs

Digital Money
I've been a full-time Bitcoin writer and researcher since early 2014.

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The Securities and Exchange Commission Investor Advisory Committee held a public meeting regarding blockchain and distributed ledger technology earlier this month, and one of the individuals who was invited to participate in the meeting was Chain CEO Adam Ludwin. During his opening remarks, Ludwin shared his perspective on the entire blockchain ecosystem (both public and private models), but the most compelling part of his appearance may have been when he shared his views on the current price mania around cryptocurrencies and initial coin offerings (ICO).

“I think you have to look at it from the perspective of the buyer and the seller mentality,” Ludwin said of the current digital asset market. “In essence, it is currently rational to be irrational as a buyer [or] a seller in this market.”

If you’re not aware, more than $3 billion has been raised through ICOs since the beginning of 2017 (according to Coinschedule). For those who don’t know the first thing about ICOs, check out Laura Shin’s in-depth piece about this new financial phenomenon from earlier in the year.

The Buyers of ICOs

When discussing the kinds of people who are participating in ICOs and token crowdsales during his appearance at the public meeting, Ludwin was quick to point to those who have already made large sums of cash by speculating on the prices of bitcoin and ether over the past few years.

“On the buyer side, there are many, many people who invested early in bitcoin, made a tremendous amount of money and now have, effectively, a house money effect weighing on them where it’s found money — it’s a windfall — and they’re diversifying into every new project that comes along because: Why not?” explained Ludwin. “If you’ve made money, you might as well say, ‘I’ll keep going.’”

Ludwin also pointed to those who sat on the sidelines while bitcoin and ether went up a hundredfold or more because they didn’t understand the technology as probable buyers of new digital assets.

“Now, you almost have this inverted mindset where you tell yourself, ‘Alright, I have to look for things I don’t understand, and the more confusing it is, the better investment it probably is,’” said Ludwin. “It’s a very perverse mentality, obviously.”

As The New York Times recently reported, some ICOs are also obtaining the services of celebrities like Floyd Mayweather and Paris Hilton to promote their projects to those who have no basic understanding of cryptocurrencies or blockchain technology.

The Sellers of ICOs

From Ludwin’s perspective, the irrational exuberance from the buy side of the market has led to the creation of many new projects willing to meet that demand. The Chain CEO shared three reasons as to why it’s extremely tempting for individuals and teams to create, issue, and sell new cryptocurrencies.

“Number one, there’s no dilution (it’s not equity in the traditional sense) and there’s no debt — you don’t have to pay it back,” said Ludwin. “People are buying for the appreciation expectations. It’s really free financing; it’s a remarkable instrument. [Secondly], there’s a belief out there that, by selling tokens, you’re creating evangelists for your project and they will tell their friends [about it]. And the truth is that’s probably right. People are interested in spreading the news about a new token in order for their tokens to go up in price and the sellers do have a kind of product/market fit. Of course, the thing that people are buying is a dream of making money, not interest in the underlying service usually. Finally, there’s an ability now by issuing these tokens to actually exit before you start. Normally, when you build a company, the exit comes at the end (and that’s why it’s called the exit). Here, if you issue a token and you can clear tens of millions of dollars before your project even launches, it’s an even better deal than we had in the 90s [dotcom bubble].”

The perfect example of the inability for some companies or projects to resist the urge to do their own ICO might be messaging app Kik’s Kin token. According to CoinJournal, Kik CEO Ted Livingston admitted that they were essentially launching the token because they had no other way to compete with Facebook. Kik was able to raise nearly $100 million in their token distribution event — money that comes with all of the benefits mentioned by Ludwin.

Ethereum’s ERC-20 token standard has also made it extremely easy for anyone to launch a new digital asset with the click of a button. BitTorrent creator Bram Cohen discussed the ease with which tokens can be launched on top of Ethereum at the Blockstack Summit earlier this year.

“A lot of what people are doing now are these like ERC-20 tokens and stuff on Ethereum for their ICOs mostly because they don’t possess the skills to roll out an actual altcoin for the most part, which is not confidence inspiring,” said Cohen. “As a general rule, if you don’t possess the skills to roll out an altcoin, you probably shouldn’t be doing an ICO.”

In the past, those who wanted to launch a new, tradeable token needed to create their own blockchain from scratch and convince exchanges to take the time to add it to their platform. The ERC-20 standard has made the process of adding a new token to an exchange much simpler because many of the new tokens follow the same general structure.

Cryptocurrencies are Still Here to Stay

Although Ludwin took part of his time to address the obvious (some would call) bubble in the cryptocurrency market, he still sees a bright future for this new asset class.

“Despite what probably sounds like a bit of cynicism here on cryptocurrencies and the fact that it’s obvious, I think, to every fair observer that we’re witnessing a mania that will have a correction . . . you should not bet against cryptocurrencies in their long term sustainability or viability and the reality that they are a new asset class, that they’re enabling a fundamentally new and important segment, and I think [they] will only increase globally in value over time,” said Ludwin.

Interestingly enough, Ludwin would go on to say that the permissioned, consortium blockchains being worked on by banks may be in an even bigger bubble of sorts.

“The noise and the hype are even greater, in my opinion, around these enterprise blockchains,” said Ludwin.

I'm a writer who has been following Bitcoin since 2011. I've worked all over the Bitcoin media space -- from being editor-in-chief at Inside Bitcoins to contributing to Bitcoin Magazine on a regular basis. My work has also been featured in Business Insider, VICE Motherboard...